PLBY Group, Inc. 10-Q Summary
Business context and reporting period
PLBY Group, Inc. markets the Playboy brand through licensing, direct-to-consumer products, digital subscriptions and content, and location-based entertainment. Reportable segments are Licensing, Direct-to-Consumer, and Digital Subscriptions and Content. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the prior-year periods, and the balance sheet is compared with December 31, 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net revenue | $63.6 million | $58.4 million | $198.4 million | $150.9 million |
| Gross profit | $26.8 million | $31.9 million | $104.6 million | $81.7 million |
| Approximate gross margin | 42.1% | 54.6% | 52.7% | 54.1% |
| Operating loss | $(312.9) million | $(5.5) million | $(312.2) million | $(13.5) million |
| Net loss | $(264.7) million | $(7.7) million | $(267.5) million | $(21.6) million |
| Adjusted EBITDA | $0.8 million | $5.2 million | $(0.6) million | $17.8 million |
| Net cash used in operating activities | Not separately presented for Q3 | $(56.9) million | $(42.0) million |
Q3 revenue increased 9%, while nine-month revenue increased 31%. Direct-to-Consumer revenue was $44.0 million in Q3 and $138.3 million for nine months. Licensing revenue was $14.9 million and $45.3 million, respectively, and Digital Subscriptions and Content revenue was $4.7 million and $14.1 million, respectively.
The reported losses were dominated by $301.9 million of Q3 impairment charges, including approximately $133.8 million of goodwill impairments, $116.0 million of Playboy-branded trademark impairments, and $54.1 million of trade-name and other asset impairments. Nine-month impairments totaled $308.2 million, including $4.9 million of digital-asset impairments. The company also recorded a $5.8 million gain on the sale of its aircraft.
Liquidity, cash flow, debt, and capital structure
- Cash and cash equivalents were $60.1 million at September 30, 2022, down from $69.2 million at December 31, 2021. Total cash, including restricted cash, was $65.6 million.
- Nine-month cash flow was $(56.9) million from operating activities, $11.1 million provided by investing activities, and $37.1 million provided by financing activities. Total cash and restricted cash declined by $9.9 million during the period.
- Gross debt was $227.1 million, consisting primarily of a senior secured term loan due in 2027. Net debt after unamortized issuance costs and discounts was $217.2 million. The aircraft term loan was repaid following the September 2022 aircraft sale.
- The term loan carried a stated interest rate of 6.75% at September 30, 2022, compared with 6.25% at December 31, 2021. Management estimated that a 1% change in underlying interest rates would affect annual interest expense by approximately $2.3 million.
- In May and August 2022, the company issued an aggregate 50,000 Series A preferred shares for $50.0 million of gross proceeds and approximately $48.3 million of net financing cash flow. The preferred stock has an initial 8% cumulative dividend rate, escalating after five years, and mandatory redemption provisions beginning September 30, 2027.
- The August 2022 debt amendment requires minimum consolidated cash of $40 million, restricts cash from falling below $25 million for more than five consecutive business days subject to cure provisions, and imposes leverage and transaction restrictions. The company reported compliance with its debt covenants at September 30, 2022.
- Management stated that existing liquidity is expected to fund operations, lease obligations, debt service, capital expenditures, and working capital requirements for at least the next 12 months, although additional financing may be required in the future.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Honey Birdette and TLA acquisitions and was partly offset by lower licensing and other e-commerce revenue.
- Licensing revenue declined 13% in Q3 and 7% for the nine-month period, primarily because of lower contractual revenue and licensee overages.
- Direct-to-Consumer revenue increased 22% in Q3 and 61% for nine months, but direct-to-consumer cost pressures, shipping, marketing, personnel costs, and inventory reserves reduced profitability.
- Cost of sales increased 39% in Q3 and 36% for nine months. The company recorded $5.9 million of inventory reserve charges during the nine-month period, and inventory reserves increased to $6.6 million from $1.5 million at year-end 2021.
- Interest expense increased 19% in Q3 and 36% for nine months because of incremental acquisition debt and higher interest rates.
- Foreign currency translation losses were $10.3 million in Q3 and $25.0 million for nine months, primarily reflecting the stronger U.S. dollar against the Australian dollar.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide clear numerical revenue, earnings, or adjusted EBITDA guidance. Management highlighted fourth-quarter seasonality from Halloween and holiday sales, while noting increasing competition in the costume category. Licensing partners continued to face supply-chain, inventory, macroeconomic, and COVID-related pressures, and the company expects to remain in close communication with partners during the holiday period.
- Material weaknesses in internal control over financial reporting remained outstanding. They involve the control environment, risk assessment and monitoring, IT general controls, accounting policies and documentation, management review controls, and inventory controls, including controls related to the 2021 acquisitions. Management stated that the financial statements were fairly presented but that disclosure controls were not effective.
- The company is implementing remediation measures, including hiring accounting and IT resources, formalizing policies, engaging an outside firm, implementing reporting and warehouse-management systems, and improving management review and monitoring controls.
- The company faces risks from discretionary consumer spending, inflation, supply-chain disruption, foreign exchange, variable-rate debt, COVID-19, digital-asset price volatility, execution of acquisitions, and possible additional impairment charges.
- TNR seeks more than $100 million in damages in litigation relating to a terminated license agreement; management believes the claims are without merit. No probable and reasonably estimable contingent liability was recorded. The AVS litigation remains pending, and management likewise believes the claims are without merit.
- The company reported that the Indian Harbor insurance dispute was affirmed in Playboy’s favor by a California appellate court on October 4, 2022.
- Unrecognized performance obligations totaled $383.9 million at September 30, 2022, including $376.1 million from trademark licensing contracts. This amount is not equivalent to current-period revenue guidance and remains subject to contract terms and performance conditions.
Most important facts for investors to verify
- Whether revenue growth, particularly from Honey Birdette and other direct-to-consumer operations, can offset declining licensing revenue and weaker legacy e-commerce performance.
- Whether the company can generate positive operating cash flow while satisfying the amended term-loan cash balance, leverage, amortization, and potential $10 million year-end debt-reduction requirements.
- Whether additional goodwill, trademark, trade-name, digital-asset, or other impairment charges may be required after the substantial September 2022 write-downs.
- Progress and effectiveness of remediation for the material weaknesses in internal control over financial reporting.
- The cash cost, dividend accrual, redemption terms, and potential common-stock dilution associated with the Series A preferred stock.
- The status and potential exposure of the TNR and AVS legal proceedings, neither of which had a probable and reasonably estimable liability recorded at quarter-end.
- The sustainability of reported Adjusted EBITDA, which was $(0.6) million for the first nine months of 2022 after substantial exclusions for impairments, fair-value changes, stock compensation, and other items.